The U.S. recently experienced historic devastation due to Hurricane Ian’s impact to Florida and the Carolinas, and Hurricane Fiona affecting Puerto Rico. The list of natural disasters for 2022 was already a long one before Ian came along, with disasters experienced across the country including hurricanes, droughts, floods, landslides, tornadoes, wildfires, and wind damage. Looking back at 2021 the list is even longer with ice storms and much more of the same. Every year we seem to experience more extreme weather patterns and natural disasters, and every year companies struggle more and more to absorb the financial impact of these events. Fortunately, there are government relief programs, including disaster unemployment assistance and the disaster relief tax credit, to support companies and employees in these difficult circumstances.
This article addresses these two programs. First, the federal government provides support for newly unemployed individuals following disasters. This support does not negatively impact employers. Second, the federal government has repeatedly enacted a tax credit for employers that continued to pay the wages of employees while business operations were severely impacted due to natural disasters. For these tax benefits, it’s important companies understand how to best prepare and manage as they work toward recovery.
1. Unemployment Management for Disaster Unemployment Assistance
Following the declaration of a natural disaster, employers should understand unemployment benefit options for their employees and clearly communicate those benefit options to employees in a timely manner. For employees who continue to receive pay following a loss of active employment, employers can prevent confusion by informing employees that they do not qualify for unemployment benefits. For employees no longer receiving pay, employers should educate employees on the type of unemployment claim they should file to effectively manage unemployment tax consequences.
President Biden declared a major disaster in both Florida and Puerto Rico following Hurricane Ian and Hurricane Fiona. After the declaration, the respective state unemployment departments announced that affected individuals can apply for disaster unemployment assistance (DUA). The link to Florida’s announcement can be found here, while Puerto Rico’s is linked here.
Who is Responsible for Paying Disaster Unemployment Assistance Claims?
DUA is a federally funded benefit program. Unlike a regular unemployment insurance claim, the employer is not charged. For this reason, it is essential for an employer to respond to any unemployment claims during a disaster to correctly assign financial responsibility.
DUA helps individuals whose employment has been lost or interrupted due to a major disaster but are not eligible for regular unemployment insurance benefits.
An individual is generally eligible for assistance when a major disaster has been declared by the President of the United States and one of the following results from the disaster:
- An individual
- no longer has a job or a place to work;
- cannot reach the place of work;
- cannot work due to damage to the place of work; or
- cannot work because of an injury caused by the disaster.
More on Qualifying for Disaster Unemployment Assistance
If an individual no longer has a job or place of work, can’t reach their place of work, can’t work because of damage to the place of work, or can’t work because of injury caused by the disaster, then they are likely eligible for DUA. The impact to the employee must be a direct result of the major disaster identified by the federal government. Individuals may also be eligible for this benefit if they become the primary breadwinner because the head of household was injured or incapacitated due to the major disaster.
To be eligible for DUA in Florida, an employee must:
- Provide proof of identity;
- Be a U.S. citizen, non-citizen national, or qualified alien;
- File an application for DUA with local unemployment insurance agency within 30 days of the date of the public announcement of availability of DUA2;
- Not be eligible for regular unemployment insurance;
- Be unemployed or partially unemployed as a direct result of the major disaster;
- Be able and available for work, unless injured as a direct result of the disaster (see conditions below); AND
- Have not refused an offer of employment in a suitable position.
Florida individuals can learn more about the application process here. DUA is available for weeks of unemployment beginning September 25, 2022, until April 1, 2023, if the individual’s unemployment continues to be a direct result of the disaster. The deadline to submit a claim for DUA benefits is December 30, 2022. CONNECT, Florida’s Reemployment Assistance claims system, will be available Monday – Friday, 8 a.m. – 8 p.m. ET, Saturday 9 a.m. – 4 p.m., and Sunday 9 a.m. – 2 p.m.
General Requirements for DUA in Puerto Rico include:
- Individuals who lost their jobs directly due to the disaster and work or live in an affected county may be eligible for these DUA benefits.
- Individuals unable to reach their job because they must travel through the affected area and are prevented by doing so by the disaster.
- Individuals who were to commence employment but were prevented from doing so by the disaster.
- Individuals who became the major support for a household because the death of the head of the household was caused by the disaster.
- Individuals who cannot work because of an injury caused as a direct result of the disaster.
Puerto Rico has asked residents to visit their website, www.trabajo.pr.gov, and file a claim online for the fastest results. They may also call (787) 945-7900 during regular working hours, from 7:00 am to 4:30 pm AST, Monday to Friday, excluding vacations. Claims for DUA must be filed by November 30, 2022.
Responding to Unemployment Claims Resulting from a Disaster
It is important for employers to proactively share DUA claims eligibility and application information, so employees know how to file correctly if eligible. Employees are responsible for indicating why they are seeking unemployment. If the reason they are not working is due to the disaster, they should indicate this when filing their claim.
For any unemployment claim, whether it’s a regular claim or DUA, the employer should respond that the person is not working because of the disaster if this is true. If an employee mistakenly submits a regular unemployment claim, they will be told they are not eligible but can receive DUA instead. This response prevents your unemployment tax obligation from incorrectly increasing.
2. Tax Credit for Disaster Relief
When a disaster occurs, government aid has come in many forms. One way has been to provide a federal tax credit known as the “Employee Retention Credit for Employers Affected by Qualified Disasters” commonly known as a disaster zone credit or disaster relief tax credit. This incentive provides a credit against federal income tax valued up to $2,400 (up to 40% of $6,000 of wages per qualifying employee). This is an important tax credit enabling employers to keep wages flowing to their employees when they need it most.
Unfortunately, with the recent COVID-19 pandemic, the war in Ukraine and countless other urgent matters to address, Congress has been slow in enacting the same type of relief for 2021 and 2022. Even though most taxpayers have already filed their 2021 Federal return, they should still be able to claim the credit if and when disaster relief legislation is enacted.
Experian Employer Services is confident that the legislation will be enacted by the end of this year, and we expect that the 2021 credit can be claimed on the 2022 return, eliminating the need to amend prior year returns.
The credit is not automatic. Taxpayers must demonstrate they suffered “inoperability” during the period after the disaster and ensure appropriate documentation is retained to support their position in the event of an audit. Taxpayers claiming the credit also need to show how they determined qualified wages, which are wages or compensation paid during the inoperability period used to calculate the credit.
Qualifying for a Disaster Relief Tax Credit
Determining the inoperable period can be tricky, since understanding which key performance indicators (“KPI”) are most relevant and best tell the story can be hard to track down and measure. Voluminous data can be overwhelming since year-over-year benchmarking generally needs to take place and relevant trend lines need to be parsed out of the data using various statistical methods that can require both visualization as well as multi-variable comparison.
For a retail establishment, daily sales is a likely source of KPIs. However, daily sales data needs to be normalized to address “Same Store Sales” comparisons which addresses the shift in days each year, such as aligning the first Monday of each month, etc. Seasonal fluctuations need to be accounted for as well as macro-economic trends that could be skewing data one way or the other. The key to presenting an audit-ready package is to have the visualizations available and to have the narrative well defined in advance. Pictures really do tell a thousand words, but a few good words to support the pictures are equally important.
KPIs for other industries are not that obvious. For offices, badge swipe data or similar attendance records may suffice. What we have learned from past analyses is that badge swipe data is rarely retained by many companies for very long. Accordingly, companies that have offices impacted by a disaster should go out of their way to save that information for future use. Ideally, companies should implement a longer retention period as a standard practice so that year-over-year data is always available.
For every industry, a unique KPI may be the right KPI and collecting and analyzing the data in a meaningful way is critical. Two different KPIs could tell vastly different stories and possibly not the one that supports the appropriate and most advantageous credit amount.
Avoiding Common Disaster Relief Tax Credit Mistakes
Too many companies simply use the “we know we were impaired” approach with little to no substantiation. When the IRS decides to examine their claim, they are left without proper documentation. Memories get weaker and gathering appropriate documentation becomes more difficult as time passes. The time to prepare your tax credit is as soon as possible after the disaster strikes.
Because there is no exact definition of “Inoperable” outlined in the statute, taxpayers have had to look elsewhere in the Internal Revenue Code, Treasury Regulations and case law to help make that determination. How the threshold is applied is also open to interpretation, e.g., What about multiple periods of inoperability? Does one day of unusually high activity stop the eligibility period? What about weeks of normal activity followed by a decline. Think of a hotel that is closed during a hurricane only to suffer from black mold weeks or months later. Certainly, there is more than one period that can be included. The data can illustrate it, but the narrative needs to explain it.
Applying the Credit
Once the periods of inoperability are determined, applying the disaster relief tax credit to the wages paid can also be tricky. In addition to analyzing time sheets and individual payroll records, the IRS has allowed other reasonable methods of allocating the wages. Understanding what the IRS will allow and how to perform the allocation is critical. Some companies pay weekly, some bi-weekly, some bi-monthly and some on another cadence altogether. Some companies have multiple pay periods running simultaneously for different employees or types of pay. A car dealership had pay periods tied to the first car an associate sold in a pay period through the last car sold for the same period. If the associate sold one car, the pay period was one day long. To say the least, it can be difficult to analyze and process payroll data with adequate documentation for an IRS audit, if required.
What if a bonus is paid during the eligible period that was earned during an ineligible period? What about remote workers? During the COVID-19 pandemic, remote work was extremely common. How companies analyze and document remote workers can be very important. Sometimes they can be included, sometimes they cannot. Documentation is very important.
Employer Next Steps to Support Employees
As unfortunate as natural disasters are, there are steps employers can take to minimize the impact on their employees and their business. Providing information on DUA claims can help employees receive support if they are no longer receiving a paycheck. Understanding the difference between a DUA and regular claim can also help an employer respond to claims correctly to manage their unemployment tax liability and risk. Additionally, disaster relief tax credits have provided billions of dollars in relief to impacted businesses and individuals by enabling employers to keep paychecks flowing. With the normal 3-year statute of limitations being applied, 2019 and 2020 are still open for refunds for businesses affected by previous eligible disasters. If a company was in a loss position in years prior to 2019, credits from 2017 and 2018 could still be available and possibly even longer if certain facts are present. As part of the general business credit rules, the Disaster Zone Tax Credit has a 20-year carry-forward period.
Please reach out to Experian Employer Services today or call 1-866-997-0422 to discuss your particular scenario, whether for tax credits, unemployment cost management or both, and how to mitigate the impact of a natural disaster on your employees and business.